Should you defer your state pension?
Here is a simply way to dramatically increase your state pension that many people aren’t aware of. All you have to do is delay when you start taking it.
You can’t claim your state pension until you hit a specific age – currently 62.5 years for women and 65 years for men. But once you are state pension age you don’t automatically have to take the money. By delaying it, you’ll receive a higher weekly payment or a lump sum when you do eventually start to claim.
For every five weeks you delay taking your pension, you will currently receive an increase of 1%; this equates to a 10.4% rise in your payments for each year that you defer.
So if you hit state pension age in 2015 and immediately start taking your pension you will receive £115.95 a week, which adds up to £6,029.40 a year. But if you delay claiming your pension for a year you would increase that weekly amount to £128.01, which is £627 extra over the year, according to calculations by Which?.
Alternatively, you could delay taking your state pension and claim it as a lump sum instead. To do this you have to defer for at least a year and the money is treated as if you have put it into a savings account earning 2% above base rate. So defer for one year and you would be able to take a lump sum of around £6,180.
Delay and get an £18,000 pension boost
If you don’t need to claim your pension as soon as you hit state retirement age, deferring can be very beneficial. Thanks to the pension freedoms that came in last April, many people could potentially defer their state pension for years while they use drawdown from their private pension to live off. Plus, if you have already started taking your state pension you can still defer, you simply arrange to stop receiving payments.
“The new private pension freedom rules can be used to help people secure a better retirement in a number of ways,” says Alan Higham, retirement expert and founder of PensionsChamp. “Those reaching state pension age before 6 April, 2016, including those who have already retired, can benefit from generous terms to defer their state pension.”
But at present, very few people choose to delay taking their state pension. In the six months to February 2014, just under 270,000 people started to draw it. Of that group only 23,000 were those who had put off starting to take the benefit; 92% were claiming their pension as soon as they were able to.
Naturally, you do need to have sufficient income from other sources to manage without state pension, but Fidelity reckons that when savings are taken into account, 60% of the nation’s retirees could afford to defer.
If you were to choose to defer for just two years you would benefit from an additional £18,800 over your lifetime, according to research by Fidelity. The investment firm found that the optimum time to defer averages out at seven years. By doing so retirees would receive £1,640 extra state pension every year, or £40,300 over the rest of their lifetime.
“The new pension freedoms would now allow someone to suspend or defer taking their state pension for many years while they draw down on their private pension,” says Higham. “It won’t be suitable for everyone, especially those with seriously poor health, but given the very low numbers of people choosing this option, there is a big job to be done in raising public awareness.”
But delaying taking your pension isn’t the best option for everyone. If you are in poor health you are likely to be better off taking your pension straightaway as, according to Fidelity’s calculations, you need to live at least 10 years after retirement for deferring to be worthwhile.
It is also worth noting that if you receive other benefits, such as income support, pension credit, carer’s allowance, incapacity benefit or widow’s pension, you won’t build up any extra state pension by deferring.
Act now before it’s too late
If you won’t be reaching retirement age by April 2016 then delaying is far less appealing. This is because from the new tax year the amount your state pension increases by for deferring drops from 10.4% a year to 5.8%. Also, the option of taking your deferred pension as a lump sum will disappear.
Mark Hibbitt, a chartered financial planner with Sovereign Independent Financial Advisors, says that from next April, he “really can’t see many cases where deferment is worthwhile”. He adds: “Based upon a 65-year-old deferring for two years, it would take around 13 years to recoup the income not taken. Taking your state pension and sticking it in the bank if you don’t need it could be a more attractive option.”
How to defer
Deferring your state pension is incredibly easy. When you are close to hitting retirement age, the Department for Work and Pensions (DWP) will be in touch to explain how you can go about applying for your state pension. In order to defer, simply don’t respond to that letter until you want to start taking your pension.
If you have already started claiming your state pension, and you want to stop it and defer, you should contact the DWP and ask them to suspend it.
As long as you are the right age for the 10.4% annual increase then there is no deadline for when you can defer and still enjoy that high annual bump.
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